Question

In: Accounting

At age 20 you invest $2900 that earns 11.75 percent each year. At age 30 you...

At age 20 you invest $2900 that earns 11.75 percent each year. At age 30 you invest $2900 that earns $14.75 percent per year. In which case would you have more money at 60?

Expert Solution

To calculate the future value we use the formula below

A = P (1 + r)^n

Where:

A = the future value of the investment including interest

P = the principal investment amount

r = the annual interest rate (decimal)

n = the number of times that interest is compounded

Someone who starts saving and investing in a disciplined manner at an early age gets the advantage of compounding whereby interest earned participate in future capital appreciation and longer the investment period, compounding works more in favour of achieving their financial goals.

Below example will explain you the power of compounding and the importance of starting early.

	At age 20	At age 30
Initial investment (P)	$2900	$2900
Term (years) (to get age 60)	40	30
Rate of interst (%)	11.75	14.75
Compounded/future value (working Notes)	$246774	$179878
Wealth gained	$243874	$176978

From the above, we can say that, if we invest at the age of 20 then we would you have more money at 60.

Working notes:

At age 20:

Amount (A) = 2900*(1+0.1175)^40

Amount (A) = $246774.

Wealth gained = $246774 – initial investment

Wealth gained = $246774 – $2900 = $243874.

At age 30:

Amount (A) = 2900*(1+0.1475)^30

Amount (A) = $179878

Wealth gained = $179878 – initial investment

Wealth gained = $179878 – $2900 = $176978.

ekkarill92 answered 1 year ago

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